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on Open Economy Macroeconomics |
| By: | Gianluca Benigno; Luca Fornaro; Martin Wolf |
| Abstract: | Since the late 1990s, the United States has received large capital flows from developing countries - a phenomenon known as the global saving glut - and experienced a productivity growth slowdown. Motivated by these facts, we provide a model connecting international financial integration and global productivity growth. The key feature is that the tradable sector is the engine of growth of the economy. Capital flows from developing countries to the United States boost demand for U.S. non-tradable goods, inducing a reallocation of U.S. economic activity from the tradable sector to the non-tradable one. In turn, lower profits in the tradable sector lead firms to cut back investment in innovation. Since innovation in the United States determines the evolution of the world technological frontier, the result is a drop in global productivity growth. This effect, which we dub the global financial resource curse, can help explain why the global saving glut has been accompanied by subdued investment and growth, in spite of low global interest rates. |
| Keywords: | global saving glut, global productivity growth, international financial integration, capital flows, U.S. productivity growth slowdown, low global interest rates, Bretton Woods II, export-led growth |
| JEL: | E44 F21 F41 F43 F62 O24 O31 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1803&r= |
| By: | Charlotte André Marine; Guido Traficante |
| Abstract: | We examine forward guidance (with known and uncertain duration) in a New Keynesian model for an advanced small open economy, showing that the response of the economy to this policy depends, both quantitatively and qualitatively, on some structural features through calibrations for Sweden and Spain. In particular, an announcement of future expansionary policy is positively related to the exchange rate pass-through and is larger than in the closed economy counterpart because of a better inflation-output trade-off and the exchange rate channel. We also show that multiple equilibria could arise and that the real exchange rate is a key variable driving this result. In particular, the response of output and inflation is amplified when aggregate supply is negatively related to the real exchange rate. These results could not necessarily be extended to emerging market economies. |
| JEL: | E31 E52 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2021-16&r= |
| By: | Mathias Hoffmann; Egor Maslov; Bent E. Sørensen |
| Abstract: | After the inception of the euro, the real economy in most member countries remained dependent on credit by domestic banks, which increasingly funded themselves through cross-border interbank funding. We find that this pattern of ‘double-decker’ banking integration exposed domestic banks to sharp declines in cross-border interbank lending during the eurozone crisis. As a result, domestic banks reduced lending which led to large declines in output in sectors with many small (bank-dependent) firms. We propose a quantitative small open economy model to account for these patterns and conclude that a global banking shock leading to a sudden stop in cross-border interbank lending in the eurozone is required to account for them. |
| Keywords: | Small and medium enterprises, sme access to finance, banking integration, domestic bank dependence, interbank dependence, international transmission, eurozone crisis |
| JEL: | F30 F36 F40 F45 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:397&r= |
| By: | Pierre-Richard Agénor; Luiz Awazu Pereira da Silva |
| Abstract: | This paper presents a simple integrated macroeconomic model of a small, bank-dependent open economy with a managed float and financial frictions. The model is used to study, both analytically and diagrammatically, the macroeconomic effects of five types of policy instruments: fiscal policy, monetary policy, macroprudential regulation, foreign exchange intervention, and capital controls, in the form of a tax on bank foreign borrowing. We also consider a drop in the world interest rate and examine how these instruments can be adjusted jointly to restore the initial equilibrium. Although this analysis is only partial (given, in particular, the static nature of the model and the absence of an explicit account of policy preferences), it provides new insights on how macroeconomic policies operate under a managed float and financial frictions, and how these policies can complement each other in response to capital inflows driven by "push" factors. In particular, the analysis shows that, to stabilize the economy, whether monetary policy should be contractionary or expansionary depends on which other instruments are available to policymakers. The joint use of macroprudential regulation and capital controls is also shown to provide a potent combination to manage capital inflows. |
| JEL: | E63 F38 F41 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:964&r= |
| By: | Garcia, Pablo; Jacquinot, Pascal; Lenarčič, Črt; Lozej, Matija; Mavromatis, Kostas |
| Abstract: | This paper analyses the effects of the COVID-19 pandemic shock on small open economies in a monetary union with an application to the euro area. Accounting for a high degree of openness and a strong dependence on intra and extra union trade, we focus on the size and the direction of international spillovers - both from the shock itself and from the ensuing fiscal response. To do so, we use a unified modelling framework: The Euro Area and the Global Economy (EAGLE) model. Furthermore, within this general framework, we assess the extent to which specific modelling features shape the dynamic responses to the COVID-19 pandemic. The main messages are as follows. First, fiscal spillovers from the rest of the monetary union do matter. Second, the effective lower bound amplifies the size of the spillovers. Third, the design of wage negotiations leads to wage subsidies having negative international fiscal policy spillovers. Fourth, import content of government spending interacts with the effective lower bound, strongly affecting the size and sign of spillovers. Fifth, when households have finite lifetimes, the responses of output and inflation are amplified compared to the case with infinitely lived households. Finally, a next generation EU instrument is more effective when financed using a tax on consumption. JEL Classification: C53, E32, E52, F45 |
| Keywords: | COVID-19, DSGE modelling, euro area, international spillovers, monetary union |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212603&r= |
| By: | Gunnella, Vanessa; Lebastard, Laura; Lopez-Garcia, Paloma; Serafini, Roberta; Mattioli, Alessandro Zona |
| Abstract: | The consensus back in 2008 – ten years after the introduction of the euro – was that the adoption of a common currency had made a limited impact of around 2% in total on the trade flows of the first wave of euro area countries (Baldwin et al., 2008). Since then, six more countries have joined the euro area, and firms have internationalised their production processes. These two phenomena are interrelated and may have changed the way the common currency affects the euro area economy. Therefore, with the common currency now into its third decade – and with more countries queuing to adopt it – this paper revisits the trade effects of the euro, focusing on the newer euro adopters (i.e. those countries that have adopted the euro since 2007) and their interaction with the first wave of euro area members via supply chains. The contribution of the paper is twofold. First, it revisits the estimated aggregate impact of the euro on euro area trade, as well as on trade within and between the two waves of adopters. Data on bilateral flows between 1990 and 2015 for an extended sample of countries to estimate a gravity equation indicate a significant trade impact, ranging between 4.3% and 6.3% in total on average, with the magnitude being the highest for exports from the second wave of adopters to the first wave of adopters. If a synthetic control approach (Abadie and Gardeazabal, 2003; Abadie et al., 2010) is used instead, the estimated gains associated with euro adoption are greater. In particular, exports of both intermediate and final products from countries belonging to the first wave of euro adopters to those belonging to the second wave are estimated to have increased by about 30% using this approach. The second contribution made by this paper relates to the channels through which trade might be affected by a currency union. This question is explored by looking separately at trade in intermediate goods and final products. While we find that trade gains were mainly driven by trade in intermediate goods among countries that adopted the currency earlier (5.3%), our results also show that the euro had a positive effect on the exports of final products from the second wave of adopters to other euro area countries. This effect is as high as 10.6% with the gravity model and 32% with the synthetic control approach. One of the reasons for the difference in the range of estimates between the two approaches might be that the gravity model can control for unobserved characteristics via fixed effects, while the synthetic control approach may fail to do so. These results suggest that the euro facilitated the establishment and expansion of international production chains in Europe. In turn, this is likely to have increased business cycle synchronisation in the euro area and to have supported market access for later adopters. JEL Classification: F14, F15 |
| Keywords: | euro, global value chains, gravity equation, synthetic control approach, trade flows |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021283&r= |
| By: | Carlos Alba; Gabriel Cuadra; Juan R. Hernández; Raúl Ibarra-Ramírez |
| Abstract: | This paper analyzes recent changes in the relative importance of the determinants of capital flows to emerging market economies. For this purpose, we estimate vector autoregressive (VAR) models for the period 2009-2020. Based on these models, we estimate the effects on debt flows from shocks to their determinants. Then, we quantify the contribution of each of the variables included in the model to explain the evolution of these flows in each month of the sample through a historical decomposition analysis. The main results indicate that the contribution of global risk aversion to explain the evolution of debt flows increased during March 2020 compared to the past, although its relative importance has decreased since, particularly as the performance of financial markets improved. |
| JEL: | F21 F32 F41 G15 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2021-17&r= |